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CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital

Which of the following best describes factoring 'without recourse' as a source of short-term finance for receivables?

In factoring without recourse, the factor bears the loss if the customer fails to pay because of insolvency or credit default. The seller has no obligation to refund the factor, which is why such factoring carries a higher commission than recourse factoring.

  1. AThe factor bears the loss if the customer fails to pay due to insolvencyCorrect
  2. BThe seller must refund the factor if the customer defaults
  3. CThe factor only collects the debts and gives no advance
  4. DThe factor charges no commission but only interest

Explanation

In non-recourse factoring, the factor assumes the credit risk of bad debts on approved receivables, so the seller is not liable on default. In recourse factoring the seller bears the risk, which is what the second option describes. Factors usually charge a commission plus interest on advances.

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